Analysis lays out weighty deficit impacts

JUNEAU — Fall-back options, such as large cuts in capital budgets, imposing state sales or income taxes or cutting Permanent Fund dividends, may not eliminate future deficits, according to a newly released analysis by the Legislative Finance Division.

The division, in an overview of Gov. Sean Parnell’s budget plan, says current spending levels are unsustainable without additional revenue, and simply constraining spending growth is insufficient.

Without reserves, the report says the budget would have to be reduced by $2.5 billion annually for the state to live within its means.

The report made assumptions based on the fall revenue forecast, including no growth in agency and statewide operations after next year and capital budgets set at $800 million in unrestricted general funds annually.

It says state reserves would last until fiscal year 2024 if the forecast and assumptions held. Legislative Finance Director David Teal said there would be a comparable outcome whether the state stayed on its current schedule for paying on its unfunded pension liability or went with the governor’s proposal to move $3 billion from savings toward paying down the obligation.

“In just a few short years, the bottom-line fiscal question facing Alaska legislators has changed from ‘How much can we save this year?’ to ‘How large is the deficit?’ “ the report states.

Alaska relies heavily on oil revenues to fund state government, but production has long been on a downward trend. Higher prices in recent years helped to fatten state coffers and mask the fiscal impact of the decline. The Legislature last year passed an oil tax cut in the hopes it would lead to more production. That tax cut will be the subject of a referendum that voters will decide in August.

Parnell has said the state is on strong financial footing and will exercise spending restraint and use savings to get by while oil prices are lower. Parnell’s budget office, in laying out various scenarios of its own, showed funds in the statutory and constitutional budget reserve funds could be gone by fiscal year 2022 — or the state could still have billions saved up by 2024, depending on factors like oil prices, production and spending.

According to the Legislative Finance report, the statutory budget reserve fund, which is the easier of the two funds for lawmakers to access, is projected to close out the current year at about $2.8 billion. That is after a projected draw of about $1.9 billion for this year’s budget to account for lower-than-expected revenue.

There is projected to be about $12.2 billion in the constitutional budget reserve at the end of this year, June 30, according to the report. Parnell, in his 2015 budget plan, proposed moving $3 billion from that fund toward paying down the state’s roughly $12-billion unfunded pension liability, an approach that he said would allow for flat, $500 million payments. He has said the current payment schedule, which calls for increasing payments that would top $1 billion before declining, will put too much pressure on the state budget.

The Legislative Finance report says state assistance for retirement, under the current payment schedule, “constitutes a major portion of projected deficits.”

Senate Finance Committee co-chair Kevin Meyer said lawmakers knew deficit spending was coming, which is one reason for the push to change oil taxes.

Meyer, R-Anchorage, said he believes the tax cut will lead to more production, which will lead to more revenue, but he said that could take a couple years.

He said he doesn’t see legislators talking about other possible sources of revenue, like taxation, at this point.

Nothing legislatively has been proposed, either, that would try to reduce or eliminate Permanent Fund dividends.